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How A New FLSA Overtime Rule Could Impact Your Business

Get ready, employers: a new FLSA overtime rule from the Department of Labor (DOL) could change the exempt status of many American workers, potentially making more of your salaried employees eligible for overtime pay.

What is the FLSA, and why is it important for businesses?

The Fair Labor Standards Act (FLSA) establishes basic wage standards and rules for overtime (among other provisions) for U.S. workers. It states that covered, nonexempt employees “must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay.”

While salaried employees are almost always categorized as exempt from this rule, the FLSA contains exceptions that make some salaried employees nonexempt, or eligible for overtime, if they earn less than a specific salary amount. This is a major area of compliance risk for businesses, as misclassifying nonexempt employees could result in penalties, fines, legal action, and owing up to three years of unpaid overtime for each.

What is the new FLSA overtime rule?

Anticipated to be proposed this May, the updated rule is predicted to raise the minimum salary-level requirement for white-collar overtime exemptions, or the salary threshold at which the FLSA dictates that an executive, administrative, or professional employee becomes ineligible for overtime pay.

The current salary threshold for white-collar exemptions is $684 per week or $35,568 per year, which the Trump administration raised from $23,660 annually. Now, some are predicting the new FLSA overtime rule will increase that amount to $913 per week or $47,476 per year or more, while others note that unions and advocacy groups have been advocating for raising the exempt status threshold to $73,551 annually.

Though salary is a key indicator of exempt status, it’s not the only consideration for correctly categorizing employees. Employers must consider both earnings and job duties according to the FLSA’s testing rules to determine the correct exempt or nonexempt classification.

What are the FLSA duties tests?

The FLSA duties tests are a set of guidelines for determining whether workers employed as executive, administrative, professional or outside sales employees earning more than the salary threshold are also eligible for overtime pay. These two considerations go hand-in-hand when determining correct classification. In fact, a federal judge halted a previous overtime expansion in 2016, which would have doubled the FLSA’s salary threshold for overtime pay and supported automatic cost-of-living increases every three years, ruling that such a significant increase supplanted the FLSA duties tests.

To qualify for any one of the three white-collar exemptions covered in the potential new FLSA overtime rule, all of the following duties tests must be met for each category:

Executive exemption

  • Must earn a salary of at least $684 per week

  • Primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise

  • Must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent

  • Must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight

Administrative exemption

  • Must earn a salary of at least $684 per week

  • Primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers

  • Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance

Professional exemption

  • Must earn a salary of at least $684 per week

  • Primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment

  • Advanced knowledge must be in a field of science or learning and customarily acquired by a prolonged course of specialized intellectual instruction

What exempt status changes could mean for your business

While the duties tests play a role in correct employee categorization, an increase to the minimum salary threshold for these white-collar exemptions could potentially cause many employees to lose their exempt status. If the new FLSA overtime rule significantly raises the salary threshold for the executive, administrative and professional exemptions, you may need to decide whether to reclassify some employees or raise their salaries.

The best course of action is to proactively identify and evaluate positions that could be compensated below the new threshold so you can set a strategy and take action quickly if and when a change occurs.

Need help navigating employee classifications and overtime? We can help!

Our experienced HR Advisors are experts in determining employee classifications—including exempt vs. nonexempt employees, as well as employee status vs. independent contractors. We’ll guide you through the new FLSA overtime rule and even conduct an HR audit to pinpoint any employee classification issues in your business. Think of us as your partner in successful human resource management!


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